Walgreen pays $6.7 billion for Alliance Boots stake

LONDON/NEW YORK (Reuters) - U.S. drug retailer Walgreen Co is buying a 45 percent stake in European health and beauty group Alliance Boots Holdings Ltd for $6.7 billion in cash and stock, creating the world's biggest buyer of prescription drugs.

The move expands Walgreen out of its U.S. market, where sales have suffered recently, and gives it more clout with global drug companies.

But enthusiasm among Walgreen investors might be muted by the decision to expand in Europe, which is struggling with a financial crisis, said Joe Ruggieri of ISI Group.

Walgreen shares fell 5.7 percent to $30.14 on Tuesday morning on the New York Stock Exchange.

Walgreen, the biggest U.S. drugstore chain, has an option to buy the rest of Alliance Boots in three years. A combination would create a business with over 11,000 stores in 12 countries and more than 370 distribution centers delivering to more than 170,000 pharmacies, doctors, health centers and hospitals in 21 countries.

Walgreen will pay $4 billion in cash and 83.4 million of its shares for the stake.

The company was formed by the 2006 merger of Boots, a fixture on British main streets, and Alliance UniChem, a pan-European wholesale and retail pharmacy group owned by executive chairman Stefano Pessina and private equity firm Kohlberg Kravis Roberts.

The ability to grow was a reason for the deal rather than taking Alliance Boots public through an initial offering, Pessina said during a conference call with analysts.

"If you do an IPO, you create financial value. If you do a transformational deal, you create financial value and industrial value, and you have a lot of synergies," he said.

But both companies said they had no plans for job reductions.

Walgreen will maintain its existing headquarters in Deerfield, Illinois, while Alliance Boots is committed to current support offices across Europe and keeping its operational hub in Nottingham, England, where John Boot established the British half of the business in 1849.

Walgreen said the deal, which will put four of its senior executives on the Alliance Boots board, is expected to be accretive to net earnings per diluted share by 23 cents to 27 cents in the first year following completion.

Combined synergies across both companies were forecast between $100 million and $150 million in the first year and $1 billion by the end of 2016.

European drug prices are under intense pressure as cash-strapped governments across the euro zone make deep budget cuts, but that is increasing the incentives to boost volumes and achieve economies of scale.

Walgreen's U.S. retail business has suffered since January, when it stopped filling prescriptions for members of Express Scripts Holding Co, which manages prescription drug benefits for employers and other clients. The two companies had failed to renew their contract.

Walgreen president and chief executive Gregory Wasson sought to reassure investors on the conference call the company still sees growth in the United States.

"It is certainly not a Hail Mary," Wasson said of the deal. "We are as bullish on our U.S. business as we have ever been."

Wasson said the companies first started talking 18 months ago.

FULL TAKEOVER IN THREE YEARS?

Alliance Boots, headquartered in the small town of Zug in Switzerland, was taken private for 11 billion pounds in 2007 by Pessina and KKR in what at the time was Europe's biggest leveraged buyout.

Walgreen said it would finance the cash element of the deal from existing and new borrowings.

Boots' debt rose on the announcement.

Boots' euro-denominated term loan B rose to 97.75 percent of face value on Tuesday from 94.73 percent on Monday, according to traders and Thomson Reuters LPC data.

The sterling-denominated term loan B rose to 96.25 percent from 92.11 percent.

If Walgreen decides to exercise its takeover option in three years, it will pay $4.9 billion in cash and issue 144.3 million shares for the remaining equity. It will also assume Alliance Boots' outstanding debt, which was just over 7 billion pounds at its 2011-12 year-end.

Separately on Tuesday, Walgreen reported third-quarter earnings of $537 million, or 62 cents per share, compared with $603 million, or 65 cents per share, a year earlier.

Excluding costs from the Alliance Boots deal, Walgreen earned 63 cents per share. Analysts, on average, expected earnings of 62 cents, according to Thomson Reuters I/B/E/S.

Sales fell 3.4 percent to $17.75 billion, missing analysts' estimates of $17.87 billion.

Walgreen also said it will increase its quarterly dividend to 27.5 cents per share from 22.5 cents.

(Additional reporting by Ben Hirschler in London and Juhi Arora in Bangalore; editing by Viraj Nair, Will Waterman and Jeffrey Benkoe)

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